Libra Developments Limited v Clark HC Dunedin CIV-2002-412-000039
[2011] NZHC 625
•21 March 2011
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV-2002-412-000039
BETWEEN LIBRA DEVELOPMENTS LIMITED First Plaintiff
AND RUSSELL ERNEST HYSLOP Second Plaintiff
AND LINDSAY ALLAN CLARK First Defendant
Hearing: 6, 7, 8, 9 and 21 December 2010
Appearances: P B Churchman and L Beecroft for Plaintiffs
L A Andersen for Defendant
Judgment: 21 March 2011
RESERVED JUDGMENT OF CHISHOLM J
A. The questions asked in the joint memorandum of counsel are answered in this judgment.
B. Further steps are to be taken in accordance with [245] – [247]
C. Costs are to be determined in accordance with [248].
LIBRA DEVELOPMENTS LIMITED V CLARK HC DUN CIV-2002-412-000039 21 March 2011
INDEX
Introduction [1] Preliminary legal issues [5] The earlier judgments [6] Plaintiffs’ argument [10] Defendant’s argument [16] Discussion [24] St Albans Street [37] Plaintiff’s approach [40] Defendant’s approach [42] Discussion [43] Answers to specific questions [53] Law Street [57] The general approach to disputed invoices [59] Three particular disputed items [63] Use of Law Street as security [67] When should interest cease to run? [71] Answers to specific questions [72] Eastbourne Street [75] Plaintiff’s approach [77] Defendant’s approach [79] Discussion [80] Answers to specific questions [91] Haggart Alexander Drive [94] Plaintiff’s approach [97] Defendant’s approach [98] Discussion [99] Answers to specific questions [102] Cargill Hotel [105] A brief history [106] Issues [118] Refurbishment [119] Benefit to other organisations associated with Mr Clark [148] Colin Thom [155] Material removed from Cargill House [158] “Preliminary expenses” [161] Valuation of partnership’s interest in CH 2002 [172] Valuation of “A” shares [174] Valuation of “B” shares [179] Director’s fees [180] Holding costs and interest [182] Answers to specific questions relating to Cargill House [190] Interest [200] What was a reasonable time for winding up the partnership? [206] Answers to specific questions [216]
Wages [223] Tax losses [231] Valuation of plant [237] Date of valuation/taking account [240] Four sider machine [241] Further steps [245] Costs [248]
REASONS
Introduction
[1] By judgment delivered on 4 February 20051 I declared that between February
1997 and October 2002 a partnership involving five development projects existed between the first plaintiff and the defendant. On 10 June 2008 an order was made for the taking of accounts and subsequently Price Waterhouse Coopers (PWC) were appointed to undertake that role. This judgment responds to approximately 40 questions contained in a joint memorandum of counsel that need to be resolved before accounts can be taken.
[2] After the judgment of this Court was delivered on 4 February 2005 the defendant unsuccessfully appealed to the Court of Appeal2 and then unsuccessfully sought leave to appeal to the Supreme Court3. Following those appeals orders were made by this Court concerning the scope of the partnership assets, directing that accounts be taken, and ordering particular discovery4. A further appeal by the defendant against that decision was struck out by the Court of Appeal5.
[3] Much of the time between the second Court of Appeal decision in 2008 and the time the matters currently before the Court were heard has been occupied by
discovery and related issues. This has been a drawn out and less than satisfactory
1 Libra Developments Limited & Anor v Clark HC Dunedin CIV2002-412-39 4 February 200
2 Clark v Libra Developments Limited & Anor CA26/05 31 October 2006
3 Clark v Libra Developments Limited & Anor [2007] NZSC 16
4 Libra Developments Limited & Anor v Clark CIV 2002 412 39 10 June 20085 Clark v Libra Developments Limited & Anor CA390/08 13 October 2008
process. Even at this hearing the defendant was producing documents that should have been produced earlier.
[4] Given the history contained in the earlier judgments, particularly the judgment delivered on 4 February 2005, it is unnecessary to provide any further background. Although hopefully all the questions in counsels’ memorandum are addressed in this judgment, they are not necessarily addressed in the order they appear in the memorandum. Before considering those questions I will address some preliminary legal issues.
Preliminary legal issues
[5] Notwithstanding the earlier judgments there is still an underlying dispute between the parties about some of the legal principles that will need to be applied, particularly with reference to the Cargill House project. According to the plaintiffs the defendant is attempting to re-litigate matters that have already been determined by this Court and endorsed by the Court of Appeal. The defendant denies that this is the situation.
The earlier judgments
[6] In the second judgment of this Court delivered on 10 June 2008 it was confirmed that the Cargill House project was a partnership asset and that Libra’s entitlement was not confined to the bricks and mortar in existence at the time the partnership was unilaterally terminated by Mr Clark on 30 October 2002. It was held that Mr Clark was obliged to account to the partnership for all the profits he (or entities used by him) made as a result of the opportunities arising from the partnership project. It was confirmed that fiduciary duties were owed by Mr Clark to
Libra and that they had been breached. Chirnside v Fay6 was applied.
[7] The defendant’s appeal to the Court of Appeal was struck out on the application of the plaintiffs. During the hearing before the Court of Appeal
Mr Churchman had argued (for the plaintiffs) that the defendant was attempting to
6 Chirnside v Fay [2007] 1 NZLR 433
re-argue issues that had already been determined. The defendant’s response was recorded by the Court:
[8] Mr Andersen ... contends to the contrary and wishes to advance that contention at a substantive appeal. The agreement of 12 July 2002 was executed by Mr Clark on behalf of Danube Holdings Ltd. His signature was witnessed by Mr Hyslop who also witnessed Mr Clark’s signature on behalf of Cargill Hotel 2002 Ltd. Mr Andersen’s argument is essentially that the agreement of 12 July 2002 terminated the partnership’s interest in relation to the building. He submits that the first judgment entailed only what he described as “a taking of accounts on dissolution of a partnership”, which the second judgment “transformed ... into a complicated exercise involving breach of fiduciary duty with Chirnside v Fay consequences”.
The Court concluded that “this is a distinction without a difference” and that the principles stated in Featherstonehaugh v Fenwick7were of direct application8.
[8] In Featherstonehaugh the defendants had terminated a partnership and claimed an exclusive right to a renewed lease of its glass manufacturing premises and to carry on its business. They offered to pay for the partnership’s share at valuation at termination of the partnership. Rejecting that proposition Sir William Grant said:
The [defendants’] proposition was, that a value should be set on the partnership stock: and that they should take his proportion of it at that valuation; or that he should take away his share of the property from the premises. My opinion is clearly, that these are not terms, to which he was bound to accede. They had no more right to turn him out than he had to turn them out, on those terms. Their rights were precisely equal; to have the whole concern wound up by a sale and a division of the properties. As therefore they never proposed to him any terms, which he was bound to accept, the consequence is, that, continuing to trade with his stock, and at his risk, they come under a liability for whatever profits might be produced by that stock ...
An account of partnership property was to be taken and it was to be sold. The renewed lease was to be regarded as partnership property and there was to be an enquiry as to any profits made since termination.
[9] Having accepted that the principles in Featherstonehaugh were still authoritative the Court of Appeal said:
7 Featherstonehaugh v Fenwick (1810) 17 Ves Jun 298
8 At [9]
[10] ... We accept the respondent’s argument that the Courts have determined that the respondents’ interests are not to be limited in the manner for which the appellant contends. The whole thrust of Chisholm J’s first decision was that Mr Clark owed a duty, which it is unnecessary [to] complicate with the adjective “fiduciary”, to bring about an equal result in relation to the partnership assets. They included both the shares in Danube Holdings Ltd and the business opportunities which arose during the period of the partnership. That included the opportunities that the agreement of 12 July
2002 afforded the Clark interests.
[11] It may be that the whole of the interests of the partnership in relation to the Cargill House venture are expressed in Mr Clark’s 50 per cent shareholding in Cargill Hotel 2002 Ltd. In that event the taking of accounts would presumably include a valuation of that holding. But discovery and, conceivably, further interlocutory orders needed to establish what has happened to the partnership property, will be required to permit the taking of accounts.
[12] The principle we apply is that nothing has happened which would deprive Libra of its share of the 50 per cent interest in the Cargill House project held by Mr Clark and thus the assets into which it may be traced.
The Court was satisfied that the issues Mr Clark sought to raise on appeal had, as the plaintiffs had submitted, been resolved in their favour.
Plaintiffs’ argument
[10] The earlier decisions of this Court and the Court of Appeal laid down the relevant principles which should now be applied. When it comes to the taking of accounts on dissolution of a partnership the situation is no different to that arising from a breach of fiduciary duty. The Court of Appeal has clearly accepted that the defendant was in the role of a fiduciary and was therefore subject to the obligations that arise from that situation. Although it is not disputed that the partnership could be terminated, it is what happened after termination that is important in this case, and gave rise to the breach of fiduciary duties.
[11] Following dissolution the defendant remained in sole control of the partnership assets and proceeded to act, or in many instances, refrained from acting, in a manner that was ultimately detrimental to the partnership assets. Under s 32(1) of the Partnership Act 1908 the defendant was obliged to account for the private profits (both realised and unrealised) derived by the defendant and his entities from the various projects. In undertaking that exercise a realistic approach should be
taken as to what transactions were to be regarded as giving rise to that obligation: Parkin v Alabaster9. This reflects general principles of fiduciary law, in particular that a fiduciary cannot make unauthorised profits or have divided loyalties.
[12] Apart from that there is the wider principle that where fiduciaries are guilty of wilful defaults they may be ordered to account not only for the receipts or payments that have been received, but also for receipts which ought to have been paid had they acted prudently: White v City of London Brewery Co10. Some aspects of the events occurring after 30 October 2002 fall within that general principle.
[13] In Chirnside v Fay the Supreme Court noted that joint venturers must act equitably towards each other to bring the affairs of a joint venture to an end. There is nothing different in this case, as was confirmed by the Court of Appeal. That duty of good faith is an inherent part of s 41 of the Partnership Act and this was recognised by the Court of Appeal in Sew Hoy v Sew Hoy11.
[14] Following 30 October 2002 a duty of good faith existed and the defendant was obliged to act in the best interests of the partnership in winding up its affairs. This involved completing projects that had not been completed and the defendant was obliged to account for profits that should have been made.
[15] Remedies need to be assessed on a project by project basis. In some cases a loss of chance might be an appropriate alternative. That situation could arise where the actions of the defendant were shown to have caused the plaintiffs to lose a commercial opportunity that had some value: Mallard Productions Limited v
Attorney General12. Alternatively, this is one of those rare cases where it is
appropriate to have both a taking of accounts and equitable damages. That possibility was recognised by the Supreme Court in Stephens v Premium Real Estate13. This reflects that the projects in question were development projects where profits could have been made for the partnership but, by virtue of the actions of the
defendant, were not made.
9 Parkin v Alabaster CA 127/97, 8 April 1998
10 White v City of London Brewery Co (1989) 42 Chancery 327 (CA)
11 Sew Hoy v Sew Hoy [2001] 1 NZLR 391
12 Mallard Productions Limited v Attorney General HC Auckland CP 290/94, 25 October 199613 Stephens v Premium Real Estate [2009] 2 NZLR 384 (SC)
[16] The defendant was lawfully entitled to, and did, dissolve the partnership pursuant to s 35 of the Partnership Act. Given that the partnership was dissolved in accordance with its terms, there could be no suggestion of any wrong doing by the defendant.
[17] Following dissolution assets of the partnership were to be distributed in accordance with the rules set out in s 45 and 47 of the Partnership Act. While the defendant accepts an obligation to account for both realised and unrealised profits following dissolution, this is essentially a valuation exercise and the matter should be approached on the basis of profits that would have arisen if the partnership had continued. The purpose is not to punish the defendant.
[18] It makes no difference to the final accounting that the parties were in a fiduciary relationship. The dissolution of the partnership is governed by the Partnership Act. The plaintiffs cannot pretend that the partnership was not dissolved, and any suggestion that the defendant had a general obligation to continue with the partnership business after dissolution is unsustainable. The defendant was only obliged to continue the partnership business after dissolution to the extent required by s 41 of the Partnership Act. This can be contrasted with a joint venture where there may be a fiduciary duty to complete the joint venture if one party is unlawfully excluded.
[19] Contrary to the plaintiff’s claim there was no general duty on the defendant to:
(a) Enter into a construction contract with Cargill Hotel 2002 Limited; (b) Complete St Albans Street;
(c) Develop the remainder of Eastbourne Street; (d) Develop Haggart-Alexander Drive.
The only duty was to complete with the partnership contracts or transactions in terms of s 41 of the Partnership Act.
[20] It is accepted, however, that s 41 creates not just a right, but also a duty, to realise and carry on the business if that is necessary for the purposes of realisation: Sandhu v Gill14. But that obligation has limits and does not go on forever: Sew Hoy. The defendant also accepts that if a partner is guilty of “wilful default” he can be required to account for that wilful default in the same way as a fiduciary: White v City of London Brewery.
[21] Any suggestion that the plaintiffs were entitled to equitable damages is misconceived. The right to generate profits is limited by s 41 of the Partnership Act to those necessary to “complete transactions begun but unfinished at the time of dissolution” and s 45 is effectively compensating the other partner where one partner has made profits after dissolution without the consent of the other partner. In any event it is speculative to suggest that developments after dissolution would have been profitable. This situation is different to Sanders v Lang15 where a joint venture was wrongly terminated.
[22] As to the obligation of a partner to account for profits made after dissolution, the obligations are set out in s 32(1) of the Partnership Act. This does not mean t hat every benefit received must be accounted for to the partnership. This is illustrated by Parkin v Alabaster where the Court of Appeal emphasised the need for a “realistic approach”.
[23] Finally, the concept of a loss of chance has no application because the matter is governed by the s 41 obligation to:
wind up the affairs of the partnership and to complete the transactions begun but unfinished at the time of dissolution.
In Chirnside v Fay the Supreme Court disapproved of damages being awarded on a loss of chance in a joint venture situation and Sanders v Lang has no application.
14 Sandhu v Gill [2006] 2 All ER 22 (CA)
15 Sanders v Lang HC Christchurch CIV 2006-409-002041, 20 October 2008
[24] The primary difference between the plaintiffs and the defendant revolves around the scope of the defendant’s obligations following dissolution of the partnership. The defendant’s relatively narrow approach appears to echo arguments that have already been rejected by this Court and the Court of Appeal.
[25] It is worth repeating that the partnership was involved in five different projects, not just the bricks and mortar. In each case the broad pattern was the same. The particular asset was acquired with a view to development, essentially on the basis that Mr Clark would provide the funding and Mr Hyslop would provide the expertise. It was anticipated that the development phase would provide the rewards.
[26] When striking out the defendant’s second appeal the Court of Appeal rejected the defendant’s contention that all that was required was a taking of accounts on the dissolution of the partnership16. Importantly the Court accepted that the partnership assets included the “opportunities that the agreement of 12 July 2002 afforded the Clark interests”17 and that “nothing had happened which would deprive Libra of its share of the 50 percent interest in the Cargill House project held by Mr Clark and thus the assets into which it may be traced”18. Although those comments related to the Cargill House project, the same approach is equally applicable to the other partnership projects.
[27] Even though the defendant accepts that there was a fiduciary relationship between himself and Libra, Mr Andersen sought to distance this case from Chirnside v Fay. This was primarily on the basis that Chirnside involved a joint venture which, Mr Andersen submitted, could be distinguished from a partnership. As I understand the argument, the distinction is that while there may be fiduciary duties to complete a joint venture, the continuation of a partnership post dissolution is governed by s 41 of the Partnership Act.
[28] Obviously, there are strong parallels between this case and Chirnside. They both involved development project/s. The parties had gone some distance towards implementing the project/s. One party had cut the other party out of the project/s and taken over control of the assets. And in both cases a fiduciary relationship existed.
[29] Contrary to Mr Andersen’s argument, the leading judgment in Chirnside of Blanchard and Tipping JJ emphasises the similarities, not the differences, between a joint venture and a partnership. At [71] the judgment notes that although the trial Judge had found that there was no partnership “it can clearly be said that their relationship was analogous to that of a partnership”. Then Their Honours said:
[74] There is a strong case for saying that most joint venture relationships can properly be regarded as being inherently fiduciary because of the analogy with partnership. The relationship between partners is one which has traditionally been regarded as a classic example of a fiduciary relationship in that the parties owe to each other duties of loyalty and good faith; and they must, in all matters relevant to the activities of the partnership, put the interests of the partnership ahead of their own personal interests.
Further reference to the similarities between joint ventures and partnerships can be found at [93] where their Honours noted that while like partnerships joint ventures could generally be brought to an end by appropriate notice, the previous joint venturers must still act equitably towards each other in the steps necessary to bring the affairs of the joint venture to a conclusion which is fair to all concerned.
[30] On the facts of this case I am satisfied that the principles discussed in Chirnside are applicable. It is particularly significant that after unilaterally terminating the partnership Mr Clark took over sole control of the partnership’s assets, and excluded Libra and Mr Hyslop from them. A fiduciary relationship existed. Under those circumstances I am satisfied that Mr Clark was under a duty to act equitably and fairly when bringing each project of the partnership to a conclusion.
[31] On my reading of the second Court of Appeal judgment the conclusions I
have just expressed are reflected in the Court’s “distinction without a difference”
comment19. Indeed, it would be illogical if the principles described in Chirnside applied in a joint venture situation but did not apply in a partnership situation involving a very similar scenario.
[32] I do not accept that this conclusion is in any way incompatible with the
Partnership Act. The pivotal section is s 41
41 Continuing authority of partners for purposes of winding up
After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue (notwithstanding the dissolution) so far as may be necessary to wind up the affairs of the partnership and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise:
...
As McGrath J said in Sew Hoy20, this means that there is not only a right, but also a duty to finish incomplete transactions and that duties of good faith between the partners will continue in relation to dealings with the property during winding up, including completion of unfinished contracts21. I also noted that s 3 of the Partnership Act preserves the rules of equity and common law that are applicable to partnerships except to the extent that they are inconsistent with the express provisions of the Act.
[33] Whether or not s 41 applies to each of the partnership projects needs to be considered on a project by project basis. That exercise will be undertaken when each project is considered later in this judgment. It is not disputed that if s 41 applies both realised and unrealised profits should be taken into account.
[34] At this stage it is unnecessary to respond to the competing arguments concerning loss of chance. They will be considered later in the judgment with reference to the Cargill House refurbishment contract.
[35] Finally, it would be premature to consider the possibility of equitable damages until after accounts have been taken. If that possibility is to be considered
further it is imperative that the Court has a comprehensive knowledge of all factors that might bear on the issue.
[36] Now I turn to the five partnership projects.
St Albans Street
[37] This was the partnership’s first project. The property was acquired by the partnership from one of Mr Hyslop’s companies in early 1997. Thirteen units were built and they were to be sold on what Mr Hyslop described as “sweat equity” basis, which I understand involves a form of long term agreement. By the time the partnership was dissolved on 30 October 2002 three units required completion and settlement.
[38] Since that time one of the units (unit 12) has been sold and settled. The remaining two units (units five and nine) have been rented to the intended purchasers. According to the evidence of Howard Alloo, the defendant’s solicitor, these two units still have to be completed in accordance with the unit plan and some work is required to bring them up to code compliance certificate standard. Mr Alloo accepted Mr Hyslop’s evidence that 20 hours physical work on each unit should be sufficient to complete them.
[39] Mr Alloo has prepared draft settlement statements as at 30 November 2010 for the sale of unit five (settlement figure $160,166.80) and unit nine (settlement figure $185,664.36). Those settlement statements make provision for the payment of rental up to the date of settlement and for the apportionment of rates and insurance on settlement.
Plaintiff ’s approach
[40] In 2005 Mr Hyslop was approached by Mr Clark for assistance to complete this project. His response was that the defendant would need to put his request in
writing, and Mr Hyslop heard nothing further. Over the last few months he has repeatedly offered to assist the defendant in achieving settlement of these units.
[41] In all the circumstances the Court should direct the account taker to finalise this project on the basis that all units (including units five, nine and 12) are deemed to have been completed and settled as at 30 October 2002 (the date of dissolution). Expenses incurred after that date should not be the partnership’s responsibility. Mr Hyslop’s offer of assistance to ensure actual completion stands.
Defendant’s approach
[42] The project was essentially managed by Mr Hyslop and it was difficult for Mr Clark to resolve the problems that emerged after the partnership had been dissolved. Although Mr Clark tried to resolve the matter by approaching Mr Hyslop for assistance Mr Hyslop was abusive. The Court should not proceed on the basis that the project was deemed to be completed on 30 October 2002. Rather, it should deal with the reality of the situation.
Discussion
[43] For the purposes of s 41 of the Partnership Act this project had plainly begun but was unfinished when the partnership was dissolved on 30 October 2002. This proposition does not appear to have been disputed by the defendant with any vigour. Given that s 41 applies, the duty of good faith discussed earlier needs to be kept in mind when considering completion of the project.
[44] Having dissolved the partnership and, more importantly, having excluded Mr Hyslop from the project Mr Clark can hardly be heard to complain that it was hard to finalise this project because it had earlier been managed by Mr Hyslop. The duty of good faith resting on Mr Clark required him to take all reasonable steps to bring this project to a timely conclusion so that the affairs of the partnership could be wound up. While I have no difficulty in accepting that Mr Hyslop’s response to the request for help was curt, I accept Mr Hyslop’s evidence that he asked Mr Clark to
put his request in writing and that he heard nothing further. In all the c ircumstances the request to put the matter in writing was not unreasonable.
[45] The evidence indicates that even though there were no major issues standing in the way of the completion of this project, very little has been done over the eight years since the partnership was dissolved. This cannot be reconciled with Mr Clark’s duty to bring that project to a conclusion. Clearly that duty was breached.
[46] On the other hand, I do not accept that the answer lies in be deeming the project to have been completed when the partnership was dissolved. In my view that proposition is unrealistic. As at 30 October 2002 units five, nine and 12 had not been completed. At least some of the responsibility for that situation rested with Mr Hyslop. Under cross-examination Mr Hyslop said that he would have had units five and nine up to code compliance standard by April or May 2003 if he had been given the opportunity and that this would have been done “in the normal course of things”.
[47] I am satisfied that justice will be served if a notional 12 month period following dissolution is allowed for this project to be completed. The account taker is therefore to proceed on the following basis:
(a) This project shall be deemed to have been completed on 30 October
2003;
(b)Any interest payable to the defendant in relation to this project (at the rate of 10%) will cease on that date;
(c) Units five and nine will be deemed to have settled on that date. This means that the settlement statements prepared by Mr Alloo will have to be amended so that rental up to that date is payable to the partnership and all outgoings are apportioned at that date;
(d) The partnership will be responsible for expenses properly incurred by
Mr Clark on behalf of the partnership up to that date;
(e) All reasonable expenses incurred by Mr Clark in completing the units and achieving settlement are to be treated as partnership expenses. I assume that settlement will be completed before accounts are taken so that the account taker will have the necessary information. However, if this is not the case the account taker will have to estimate those expenses after hearing from the parties;
(f)Subject to (e) above, Mr Clark will be responsible for all expenses from 1 November 2003 and will be entitled to any revenue (I expect that the only revenue will be rental);
(g) Unless the parties come to some other arrangement, Mr Hyslop is to provide assistance on the basis set out in paragraph 7.4 of his evidence (20 hours per unit free of charge subject to conditions 1 and 3 in his evidence).
On the basis that there will inevitably be an element of “swings and roundabouts” , I have not attempted to revisit the settlement of unit 12. That settlement will need to be taken into account as it stands.
[48] Three other matters require direction:
[49] First, the Watts Driveway issue. I accept Mr Clark’s evidence that he was sued and settled the claim by Mr Watts on the basis of a payment for the sealing of the driveway. The cost of $3856 was a legitimate partnership expense, and is to be accepted by the account taker.
[50] Secondly, the issue of rates (set out in Mr Hyslop’s brief of evidence at 7.6). This is to be resolved by the account taker having regard to any relevant directions in this judgment.
[51] Thirdly, invoices for repair work outside the insurance claim. The plaintiffs dispute these invoices on the basis:
... that they are for alleged weatherboard repair that was three years previously supplied by Mr Clark and should have lasted longer and should have been covered by the insurance22.
I decline to become involved in the allegation that the weatherboard repair should have lasted longer. Provided the expense was actually incurred, the quantum was reasonable, and it was not met from insurance monies, it should be allowed by the account taker. It will be for the defendant to establish those matters to the satisfaction of the account taker.
[52] Finally, the debt of $6334. This seems to have been written off. The account taker should proceed on that basis unless there is recovery before the accounts are taken (and my understanding is that reasonable efforts will be made by the defendant to seek recovery). In the event that there is recovery there will, of course, have to be an allowance for any expenses involved in achieving recovery.
Answers to specific questions
[53] Question 8.1: Does the defendant have to account to the plaintiffs for rents owing but not received as if they were received in full or are such debts an asset that is to be valued using normal valuation principles. Answer: They are to be accounted for as if they were received in full up to 30 October 2003: see [47] above.
[54] Question 8.2: Is the defendant able to claim as a partnership expense and a capital contribution the actual costs incurred after dissolution including rates, the cost of replacing weatherboard, and the cost associated with a driveway dispute? Answer: Actual costs up to 30 October 2003, including rates, will be recoverable as a partnership expense: see [47] above. The cost of the driveway dispute is also recoverable in terms of [49]. The cost of replacing the weatherboard is to be approached on the basis set out in [51].
[55] Question 8.3: Should the future costs of completing the work required on two
houses in the St Alban’s development to obtain a code compliance certificate be regarded as a liability of the partnership? Answer: Yes, as set out in [47] above.
22 Para 7.7 of Mr Hyslop’s brief
[56] Question 8.4: Should this project be vested in the defendant as complete at
30 October 2002? Answer: No. It should be vested in the defendant as complete at
30 October 2003.
Law Street
[57] This property was acquired in February 1999 and a source consent was obtained to enable three units to be created. Then the project was put on hold so that the Cargill Hotel project could be completed. After dissolution of the partnership Law Street was developed as originally planned.
[58]Four issues relating to this project require resolution: (a) The general approach to disputed invoices;
(b) Three particular disputed items;
(c) The use of Law Street as security for borrowing; (d) When should interest on this project cease to run?
The general approach to disputed invoices
[59] The plaintiffs’ position is captured in Mr Churchman’s closing submissions:
53. The first issue simply requires some consideration of what directions should be given to the account taker in relation to the disputed invoices. These may now include the bundle recently provided to the plaintiffs purporting to be “extras”. It is accepted and not disputed by the plaintiffs that the account taker, under Rule 16.22 of the High Court rules, may accept estimates in relation to costs paid or credited. However, it is submitted that a direction needs to be given, specifically, that if an estimate is claimed, and is not supported by an invoice, that the estimate must relate to a payment which has actually been paid and can be reconciled with a bank statement (i.e. an actual cost). The issue of whether or not those estimates are then accepted is a matter for the account taker.
As I understand it the plaintiffs now contend that around 55 claims are not
adequately supported by invoices.
[60] The defendant’s position is that he did not realise when he developed Law Street that he would have to account to the plaintiffs for the project. In other words, he did not realise it was a partnership asset. He considers that it should be left to the account taker to determine whether or not particular claims are taken into account.
[61] I find it remarkable that the defendant did not keep proper records of the Law Street development on the basis that he would not have to account to Libra for any profits arising from this project. It is my understanding that the development of Law Street began in June 2005 which was several months after the judgment of this Court declaring the Law Street project to be a partnership asset. In all the circumstances the failure to keep proper records in relation to this project cannot be far away from the concept of wilful default discussed in White v City of London Brewery.
[62] I agree with Mr Churchman that a broad direction to the account taker is desirable. Before an expense is allowed the account taker will need to be satisfied that the expense was actually incurred and that the quantum was reasonable in all the circumstances. Generally, invoices will satisfy that requirement. However, if estimates are relied on, the defendant will need to establish to the satisfaction of the account taker that the payment was actually made and that the quantum was reasonable.
Three particular disputed items
[63] Specific directions are sought in relation to three items.
[64] The first two relate to timber supplied by L A Clark Limited for which there was apparently no invoice (estimated by Placemakers at $30,008) and a belated joinery invoice from Wood Solutions for $33,773. Mr Hyslop believes that both these amounts are inflated. He has calculated that a reasonable charge for the timber would be $13,910 and that $16,700 would be a reasonable charge for the joinery. In other words his figure is less than half the amount that has been claimed.
[65] As to the supply of timber, I prefer Mr Hyslop’s evidence to the Placemaker’s estimate. This reflects several matters. First, given that Mr Clark was actively involved in the project when the timber was supplied and that it was his firm supplying the timber, it was for Mr Clark to keep records that would enable his claim to be verified. For whatever reason failed to do so. Secondly, Mr Hyslop is well qualified, both by his experience as a builder and his previous connection with this project, to assess the actual cost of the timber. He did so by way of a site inspection and calculations based on the plans that were available to him. Thirdly, even though Mr Hyslop’s calculations were contained in his brief, no flaws were exposed in his calculations. Indeed, there was no real attempt to challenge his evidence in this regard. Given the vigour with which this litigation has been fought I think it is highly likely that Mr Hyslop would have been challenged on his calculations if it was thought that a challenge would succeed.
[66] For similar reasons I accept Mr Hyslop’s evidence in relation to the joinery units. It is extraordinary that no invoice was rendered at the time, and the invoice that was supplied some years after the event is singularly uninformative. By comparison Mr Hyslop provided a detailed calculation which Mr Clark said under cross-examination he had not looked at because “I left it with my manager”.
Use of Law Street as security
[67] It is the plaintiffs’ case that Law Street was used as security by Mr Clark to purchase Wood Solutions (which I found in the first judgment was not a partnership asset). The plaintiffs contend that there should be an accounting for the benefits derived from this unauthorised use of a partnership asset. As I understand it, their contention is that the advances made by the defendant to the partnership should be notionally reduced by $85,000 for the purposes of calculating the 10% interest payable to the defendant.
[68] These allegations are denied by the defendant. His fall-back position is that no loss was suffered by the partnership and there is nothing to account for.
[69] Despite the defendant’s denial I accept that Law Street was used as security for the Wood Solutions purchase and that this was without Libra’s consent. In other words, a partnership asset was used by Mr Clark for private purposes. Under those circumstances s 32(1) of the Partnership Act requires Mr Clark to account for any benefit received.
[70] While I accept that some benefit was received by Mr Clark and that the broad approach suggested by the plaintiffs has merit, I have concluded that the amount suggested by the plaintiffs is too high. This reflects my view that Mr Clark’s personal covenant was strong and that the security over Law Street was not nearly as significant in facilitating the purchase of Wood Solutions as the plaintiffs contend. There will, therefore, be a reduction of $30,000 in the sum attracting interest from the date on which the security was provided over Law Street.
When should interest cease to run?
[71] Interest payable to Mr Clark in relation to the Law Street project will cease to run at the time this project was completed. It will be for the account taker to determine that date after hearing from the parties.
Answers to specific questions
[72] Question 6.1: Is the amount claimed by the defendant for timber used on the Law Street development appropriate or does it require adjustment? Answer: The amount is to be reduced to $13,910: see [65] above.
[73] Question 6.2 Is the defendant able to claim the invoices from Wood solutions for joinery as expenditure on the development at face value? and Question 6.3: If the defendant cannot fully claim the amount of the invoices from Wood Solutions, what is the proper amount for him to claim for expenditure on joinery? Answer: The amount is to be reduced to $16,700: see [66] above.
[74] Question 6.4: What method should be sued to resolve the dispute over 77 disputed expenditure items totalling $86,308.84 that the defendant has claimed for this project? Answer: Within six weeks from the date of this judgment the parties are to discuss all the disputed items in an attempt to resolve them. Genuine attempts to compromise should be at the forefront of these discussions. Any items that cannot be resolved in this way will have to be determined by the account taker applying the general principles discussed at [62] above. In that event the account taker will, of course, need to hear from the parties.
Eastbourne Street
[75] In 2002 Mr Hyslop commenced a 53 unit titled development at Eastbourne Street. When Mr Hyslop was adjudicated bankrupt nine unit titles were sold by the mortgagee to Mr Clark who continued the development. By the time the partnership was dissolved on 30 October 2002 three further units had been completed. Six sites remained undeveloped.
[76] The current situation is that the development has stalled. The underlying reasons are relatively complex. I was told by Johannus Van Bolderen, a solicitor and an expert witness called by the defendant, that in order to complete this development a further staged development plan will have to be deposited and the units completed. To achieve this all existing unit holders will have to consent, although that situation may be improved by the Unit Titles Act 2010.
Plaintiffs’ Approach
[77] Had Mr Hyslop not been excluded from the project the development could have been completed without major difficulty or cost. In 2004 the cost would have been around $10,500. The suggestion that existing unit owners will have to consent is inaccurate because the initial conveyancing included a covenant that avoided the need for that to happen (by providing a power of attorney in favour of Mr Hyslop).
[78] The defendant had an obligation to complete this development and should be required to account to the plaintiffs for the unrealised profits. This could be achieved by either placing a value on the unrealised profits or approaching the matter on the basis that it constitutes the loss of a chance. Had the defendant complied with his fiduciary obligations, each of the six units would have realised $297,000 gross and the project would have been completed by 2007. The cost of each unit can be derived by extrapolating the Law Street costs.
Defendant’s approach
[79] There was no obligation on the defendant to complete this project. Following dissolution of the partnership the development stopped because of major difficulties in respect of titles and the need to re-survey the whole property. This situation was attributable to the actions of Mr Hyslop for which Mr Clark should not be held accountable. When endeavouring to resolve the situation the Court should recognising the current situation, including ongoing costs that have been incurred by the defendant.
Discussion
[80] Again I am satisfied that for the purposes of s 41 of the Partnership Act this project had begun and remained unfinished at the time the partnership was dissolved. This reflects that it had started out as a 53 unit development. Mr Alloo confirmed that the original unit development plan included all those units. Apart from that, I accept Mr Hyslop’s evidence that the partnership had fully reticulated all the sites and that there was (and still is) sufficient cladding to complete all six houses that remained uncompleted as at 30 October 2002.
[81] It follows from that finding that an obligation rested on the defendant to complete the development so that this component of the partnership operation could be wound up within a reasonable time. While the complications that existed at the time of dissolution did not negate that obligation, they are obviously relevant to the
timeframe within which it could reasonably be expected that the project would be finished.
[82] I have no doubt that if the partnership had not been dissolved and if
Mr Hyslop had not been trespassed from the property (by notice issued on
30 October 2002), the development would have been completed long before now. Mr Alloo acknowledged that there had been no real attempt to resolve the situation, at least by gaining the co-operation of the other unit owners. The lack of action since dissolution has obviously not helped the situation, and probably made it worse. For example, a letter from the surveyors to Mr Alloo on 24 September 2004 indicated that the survey fees were estimated to be in the region of $10,500. In all probability the fees will now be much higher. Nevertheless, I will take a pragmatic approach based on “swings and roundabouts” and allow the reasonable costs of finishing the project as a partnership expense.
[83] On the evidence that I heard from Mr Hyslop and the two solicitors (Mr Van Bolderen and Mr Alloo) there are not, and have never been, any insurmountable difficulties standing in the way of completing the Eastbourne Street project. It seems that a new plan will be required and in all likelihood the signatures of at least some of the other unit owners and mortgagees will also be required. But the covenant in the earlier sales might mean that this is not as big a problem as presently portrayed by the defendant. The Unit Titles Act 2010 might also assist.
[84] It seems to be tolerably clear that there are unrealised profits relating to this project. The difficulty is in arriving at a formula that will enable the account taker to arrive at a result that is fair to both parties.
[85] I do not consider that this could be achieved by an approach based on the McPherson valuation of 10 November 2010. That valuation proceeds on the basis that the undeveloped sites are valued in that state. However, as Mr Hyslop said, and I accept, it was never contemplated that the six remaining sites would be sold undeveloped. The whole purpose of the project was for all the sites to be developed at a profit. Moreover, an approach based on the sites being valued in their
undeveloped state would not sit comfortably with s 41 of the Partnership Act which contemplates completion of transactions that have been started.
[86] Apart from that, an approach based on the McPherson valuation would mean that the partnership asset would be valued at a time when values are comparatively low even though the project should have been completed at a time when, on Mr Hyslop’s unchallenged evidence, there was an “extremely bullish market” (from mid
2006 to mid 2008). This would reward Mr Clark for his inaction and leave him in a position where, as the owner of the asset, he would be able to turn it to his personal advantage once prices recover.
[87] Mr Hyslop contends that it would have been reasonable for the undeveloped units to have been completed by 2007 (which I will interpret as 31 December 2006). Around four years after dissolution does not seem out of the way, and I accept that proposition.
[88] Having adopted the starting point of completion by 2007, Mr Hyslop then set about calculating the unrealised profits. Using Quotable Value statistics, Law Street figures, and earlier sales of Eastbourne Street units, Mr Hyslop arrived at a figure of
$297,000 gross per unit. The defendant did not endeavour to challenge Mr Hyslop’s arithmetic. Given that nothing appears to be untoward or illogical in Mr Hyslop’s approach, I accept it.
[89] As far as the expenses are concerned Mr Hyslop extrapolated the expenses from Law Street, subject to an adjustment for exterior cladding. He could not, however, complete the exercise because final figures were dependent on rulings relating to the Law Street expenses. Again that broad approach was not challenged, and I adopt it.
[90] The account taker is therefore to proceed on the following basis:
(a) This project shall be deemed to have been completed on
31 December 2006;
(b)Any interest payable to the defendant in relation to this project will cease on that date;
(c) The partnership will be responsible for outgoings such as rates up to
31 December 2006 and thereafter Mr Clark will be responsible;
(d)All expenses reasonably incurred in obtaining title to the units shall be treated as a partnership expense. Again I assume that this will be completed before accounts are taken so that the account taker will have the necessary information. If this does not prove to be the case the account taker will have to estimate those expenses after hearing from the parties;
(e) It is to be assumed:
(i) Each unit would have sold for $297,000 gross;
(ii) The expenses for each unit would have been in line with those incurred in building the Law Street units (subject to a credit of
$2812 per unit for the cladding and any adjustment that might be needed to reflect the other directions that I have made in relation to Law Street). Hopefully, the parties will be able to present an agreed figure to the account taker. If not, the account taker will have to determine the issue after hearing from the parties.
Answers to specific questions
[91] Question 7.1: Did the defendant have an obligation to develop [Eastbourne
Street] after dissolution of the partnership? Answer: Yes: see [81] above.
[92] Question 7.2: If the defendant had an obligation to develop [the property] then what are the consequences of his failure to do so, and is the plaintiffs’ proposed methodology of accounting, appropriate. Answer: Yes, the plaintiff’s method of
accounting is appropriate and the account taker is to proceed in accordance with [90]
above.
[93] Question 7.3: Is the defendant able to claim each payment he has made for [Eastbourne Street] after dissolution as a partnership expense and a capital contribution by him. Answer: He can only claim expenses in accordance with [90] above.
Haggart Alexander Drive
[94] This block of land at Mosgiel was purchased in 2001. It was subdivided off a larger block of land and there were issues about boundaries and a paper road. Title was not obtained until 2002. A valuation indicates that as the land stands it is capable of subdivision into seven allotments.
[95] After the Cargill Hotel project was completed the defendant took steps, it seems around 2004 or 2005, to acquire the road reserve. To date those steps have not borne fruit.
[96] A valuation obtained by the plaintiff in August 2007 indicated a market value of the land at $650,000 (including GST). The defendant obtained a valuation in November 2010 which showed that by that time the value of the land had dropped to
$290,000 (excluding GST).
Plaintiffs’ approach
[97] There was nothing to prevent the defendant from progressing the subdivision and development of the property. The issue of obtaining the adjoining road reserve is irrelevant because the subdivision could have proceeded without the addition of the road reserve. At the very least, the duty of good faith resting on the defendant required him to maximise the value for the partnership by selling when that was economically viable, such as in 2007.
Defendant’s approach
[98] He was not under any obligation to develop the land after the dissolution of the partnership. The most recent valuation of the land represents its current value and the partnership should be wound up on the basis of that valuation with the partnership being allowed expenses down to the present time.
Discussion
[99] Unlike the other projects discussed to this point, there is no evidence that in terms of s 41 of the Partnership Act the development of this property had begun but remained unfinished at the time of dissolution. Moreover, I do not accept that there was some wider duty resting on the defendant to complete the development of the land. For those reasons I do not accept that this project justifies an allowance based on the loss of chance.
[100] In my view it is simply a matter of notionally winding up this component of the partnership operation on a basis that is fair to the parties. Given that there were no delays arising from the need to develop the property there is no reason why this aspect of the partnership could not have been wound up within a relatively short time. However, rather than selecting a date that would require a further valuation, I will take the pragmatic approach that the value of the property is indicated in the plaintiff’s valuation of 9 August 2007.
[101] Given that approach, the account taker is to proceed on the following basis:
(a) This project should be deemed to have been wound up on 9 August
2007;
(b)Any interest payable to the defendant in relation to this project shall cease on 9 August 2007;
(c) The market value of the land shall be that shown in the 9 August valuation;
(d)The partnership shall be responsible for outgoings on the land up to that date including the reasonable costs of endeavouring to solve issues concerning the paper road;
(e) Subject to (d) above, Mr Clark shall be responsible for outgoings and expenses after 9 August 2007 and the property shall be deemed to have been beneficially vested in him from that date.
Answers to specific questions
[102] Question 7.1: Did the defendant have an obligation to develop [Haggart- Alexander Drive] after dissolution of the partnership? Answer: No: See [99] above.
[103] Question 7.2: If the defendant had an obligation to develop [Haggart- Alexander Drive then what are the consequences of his failure to do so, and is the plaintiff ’s proposed methodology of accounting appropriate? Answer: Not applicable. The valuation of 9 August 2007 is to be adopted: see [101] above.
[104] Question 7.3: Is the defendant able to claim each payment he has made for these properties after dissolution as a partnership expense and a capital contribution by him? Answer: Outgoings on the property up to 9 August 2007 are a partnership liability for which Mr Clark is entitled to be reimbursed and thereafter they are Mr Clark’s responsibility: see [101] above.
Cargill Hotel
[105] This project presents numerous and difficult issues.
A brief history
[106] In June 2000 Danube Holdings Limited (DHL) entered into a contract to purchase Cargill House, a multi story building in the Dunedin CBD for $1,000,065. Originally DHL was a shelf company. Before Cargill House was purchased the
shares in DHL were transferred to Mr Clark who became the company’s sole shareholder and director. The purchase, which was settled on 17 August 2000, was financed by a mortgage from Albert Alloo & Sons Nominee Company. Following settlement Mr Hyslop and his family moved into temporary accommodation in the premises.
[107] At Mr Hyslop’s instigation Stuart McLauchlan, a director of Scenic Circle Hotels, was approached about the possibility of Cargill House being converted into a Scenic Circle hotel. Negotiations with Scenic Circle followed and bore fruit.
[108] A joint venture agreement was entered into on 12 July 2002 (the heads of agreement). Mr Clark was one of the signatories. All the signatures were witnessed by Mr Hyslop.
[109] In simple terms the heads of agreement provided for the incorporation of Cargill Hotel 2002 (CH 2002) and the sale of the property from DHL to that company for $1.8m plus a further $1.2m to be paid by CH 2002 at a later time. Thus the total purchase price was $3m. Mr Clark’s interests (his trust) were to hold 50% of the ordinary shares in the company and the Scenic Circle interests the other 50%. The building was to be converted into a Scenic Circle Hotel and, following conversion, the hotel was to be managed by Scenic Circle Hotels Management Services Limited.
[110] The ownership structure of CH 2002 can be summarised:
(a) There are one million ordinary (A) shares which carry voting rights and 120 (B) shares which do not carry voting rights;
(b) Fifty per cent of the (A) shares are held by a trust (Cargill’s Hotel
Trust) settled by Mr Clark;
(c) The other 50% is held by Scenic Circle interests (through Clipper
Investments 2002 Limited);
(d)Mr Clark’s trust owns the 120 (B) shares which CH 2002 can repurchase at $10,000 per share (thereby constituting the deferred payment of $1.2m);
(e) The directors of the company are Mr Clark, Mr Alloo, Mr McLauchlan and Earl Hagaman ;
(f) Each shareholder (that is, Mr Clark’s interests and the Scenic Circle
interests) was required to make a shareholder advance of $1,250,000).
[111] The heads of agreement were conditional upon:
2.7 DHL entering into a contract with Cargills23 (on terms which are acceptable to DHL, Cargills and CIL24) for DHL to undertake building and construction work in respect of the hotel within 50 days of the date of this agreement.
If the conditions of clauses ... 2.7 are not satisfied then this agreement shall be at an end.
No such contract was entered into. But the joint venture proceeded. This clause is of considerable importance when it comes to resolving some of the disputed issues.
[112] The heads of agreement required the shareholders of CH 2002 to enter into a shareholders agreement containing various specified terms, including:
(a) The provision of vendor finance of $1.2m from DHL which was to carry interest at 6%. This loan was to be repaid first from the “net profit” each year. That expression was defined in clause 3.2(g)(ii) of the heads of agreement;
(b) From the time that the vendor’s advance was repaid the net profit was
to be used by the company to repurchase the (B) shares ($1.2m);
(c) It is implicit that the shareholders’ advances ($1,250,000 each) would be paid last.
23 Cargills is CH 2002
24 Clipper Investments 2002 Ltd
Although a draft shareholders’ agreement was prepared, it was never signed. However, for present purposes nothing turns on that.
[113] The remaining provisions of the heads of agreement covered various matters. These include work to be undertaken by DHL (primarily removal of asbestos), transfer of the building from DHL to Cargill’s, its conversion into a hotel, and provision for a hotel management agreement.
[114] Before the heads of agreement was entered into there had been negotiations between Mr Hyslop and Mr Clark as to Mr Hyslop’s entitlement in the Cargill Hotel project. When these negotiations stalled Mr Hyslop lodged a caveat against the Cargill Hotel title on 28 August 2002, following which there was a marked deterioration in the relationship between Mr Hyslop and Mr Clark and, presumably, between Mr Hyslop and the Scenic Circle interests.
[115] An email from Lani Hagaman indicates that by 11 October 2002 Mr Hyslop was no longer part of the hotel project “team”. He and his family were evicted from the Cargill building on 30 October 2003 amid considerable acrimony. Thereafter he was excluded from the project and did not play any further part in it.
[116] Originally it had been intended that the hotel would have 80 rooms. This was later amended to 110 rooms. The additional cost was met from savings on budget and an injection of $600,000 from the Scenic Circle interests. Conversion to a hotel started in mid 2003 and the hotel opened on 1 March 2004. The final cost of the refurbishment was around $8m. This represented savings on budget of approximately $1.3m.
[117] Ownership of the property was formally transferred from DHL to CH 2002 on 4 February 2004. There was also a delay in transferring the shares in CH 2002 from the defendant who, as already mentioned, was initially the sole shareholder and director of that company. This transfer was not formally completed until after the refurbishment contract had been completed. Since opening the hotel has traded successfully. Further alterations to the eighth floor are currently in progress.
Issues
[118] Issues requiring direction concern:
(a) Refurbishment of Cargill House (its conversion into a hotel); (b) A number of sub-issues relating to the refurbishment:
(i) Whether there was any benefit to other organisations (ii)
associated with Mr Clark;
Colin Thom;
(iii)
(iv)
Material removed from Cargill House;
The issue of “preliminary expenses”;
(c) Valuation of the partnership’s interest in CH 2002; (d) Valuation of (A) shares;
(e) Valuation of (B) shares; (f) Director’s fees;
(g) Holding costs/interest.
Inevitably there is a degree of overlap between these issues, which will now be considered.
Refurbishment
[119] It is the plaintiffs’ case that the “right” of the partnership (through DHL) to undertake the refurbishment contract pursuant to clause 2.7 of the heads of agreement was of critical importance and that the defendant abandoned that
entitlement in favour of pursuing his own personal interests. The plaintiffs contend that if DHL had undertaken the contract the profits could have been used by the partnership to partially fund its shareholders’ advance of $1,250,000 and that this would have reduced the amount attracting interest at 10% to Mr Clark.
[120] Underlying the plaintiffs’ case are four primary submissions:
(a) Contrary to his duty of fairness, the defendant abandoned the
partnership’s entitlement to undertake the refurbishment contract.
(b) Having abandoned that entitlement, the defendant personally, not
CH 2002, undertook the refurbishment contract;
(c) Other entities operated by the defendant also benefitted. Those entities are: L A Clark Limited (timber merchant), Woodworks Southern Limited (joiner), and A Step Up Joinery Limited (building supplier and joiner);
(d)Alternatively, by abandoning the contract the defendant wrongly deprived the partnership of the chance to undertake the contract.
The plaintiff contends that by virtue of any one or more of those matters the partnership is entitled to compensation for the profit that was made by the defendant and the companies in which he had an interest, or alternatively, compensation for the loss of the chance to do so.
[121] All of those allegations are denied by the defendant. In particular he:
(a) Denies that clause 2.7 conferred on DHL the right to carry out the work. He claims that the real reason that DHL did not carry out the work was, first, that Mr Hyslop was unacceptable to the Scenic Circle interests and, secondly, that in any event it would not have been practicable for DHL to carry out the refurbishment work;
(b) There was no breach of any duty;
(c) The refurbishment work was undertaken by CH 2002 itself, not
Mr Clark;
(d)There was no benefit to Mr Clark or to any of the companies in which he was involved.
Given those circumstances the defendant denies that there is any obligat ion resting on himself or any companies with which he is associated to account to the partnership or the plaintiffs.
[122] I begin by considering the circumstances surrounding the inclusion of clause
2.7 in the heads of agreement.
[123] Discussions with Scenic Circle had been in progress for around 12 months before the heads of agreement were signed. Evidence at the first trial suggests that negotiations with Scenic Circle started in July 2001. And a letter written by Mr Clark to Mr and Mrs Hagaman just before the heads of agreement were signed mentions that it “was agreed by both parties on or about the middle of November last year to proceed towards a formal Heads of Agreement”. So when the heads of agreement were signed Scenic Circle must have been well aware of the qualities and capabilities of Mr Hyslop and DHL.
[124] Equally importantly, the documentary record discloses that Mr Hyslop was still deeply involved in the project at the time the heads of agreement were signed, and that situation prevailed for some time thereafter. For example, after the heads of agreement had been signed Mrs Hagaman was emailing Mr Hyslop, not Mr Clark, about the structure of the joint venture. She was also telling Mr Hyslop that a potential conflict of interest “doesn’t mean you can’t join the board once the development is completed”, that he was “a fundamental part” of the team, and that she saw his involvement “being very extensive in ensuring we get a great product at a great price”. As late as 12 August 2005 Mrs Hagaman emailed Mr Hyslop with an update as to the revised plans.
[125] The evidence dispels any suggestion that when the heads of agreement were signed any of the parties believed that DHL lacked the physical ability to administer the refurbishment contract. Indeed, Mr McLauchlan confirmed in his evidence in chief that “the original proposal” was for the construction work to be carried out by DHL and under cross-examination he accepted that when the heads of agreement were signed he expected DHL would be doing the refurbishment work “subject to the terms and conditions being met”. This is also entirely consistent with the fact that the joint venture agreement was to be terminated if the refurbishment contract with DHL was not entered into within the 50 day time frame (which ended at the end of August 2002). Obviously the parties saw the refurbishment contract with DHL as a critical step in the joint venture.
[126] Even as late as 18 August 2002 the Scenic Circle interests were still proceeding on the basis that DHL would administer the refurbishment contract. On that day Mrs Hagaman sent an email to Mr Hyslop saying, amongst other things:
He (Richard Hayman) is aware that you are a major part of the process ... whilst I understand Danube’s role we have all agreed (on numerous occasions) that the specific tasks will be tendered in order to ensure anyone taking part under Danube is doing so at a fair rate – you of course will be the party that scrutinises this in order for the board to select from the parties you put forward ... Danube’s scope of work will be discussed on Wednesday.
Again, it is highly significant that communications of this nature are with Mr Hyslop rather than Mr Clark. Plainly Mr Hyslop was still playing an important role in the joint venture.
[127] But behind the scenes the situation between Mr Hyslop and Mr Clark was deteriorating. Mr Hyslop had been pressing Mr Clark to formalise the partnership arrangements in relation to the Cargill House project. After negotiations stalled Mr Hyslop issued his caveat against the Cargill House title, mediation failed, and Mr Clark ultimately dismissed Mr Hyslop and took over the partnership’s interest in the project.
[128] I am satisfied that Mr Hyslop’s dismissal from the project was the trigger to DHL failing to obtain the refurbishment contract. Had it not been for those actions I think it is more likely than not that the contract would have been performed by DHL
and that there would have been a significant profit in it for that company, and thereby the partnership.
[129] It is, of course, inherent in those conclusions that I do not accept the explanation advanced by the defence for the failure to award the contract to DHL. My reasons follow.
[130] I do not accept Mr Hagaman’s evidence that he and his wife “quickly” formed the view that Mr Hyslop was not someone Scenic Circle could work with and that he thought Mr Hyslop was only a “gofor”. In fact they had been working with Mr Hyslop for a long time and must have been aware when the heads of agreement were entered into that Mr Hyslop’s involvement was crucial if DHL was to administer the refurbishment contract. While I have no doubt that once Mr Clark and Mr Hyslop had fallen out Mr Hyslop ceased to be someone that Scenic Circle could work with, the evidence indicates that that was not the situation when the heads of agreement were signed. Nor does the surrounding evidence support Mr Hagaman’s evidence that he regarded by Mr Hyslop as a “gofor” at that time.
[131] To the extent that Mr Clark and Mr McLachlan attempt to explain the failure to award the refurbishment contract to DHL on the basis that the involvement of Mr Hyslop was unacceptable to Scenic Circle interests and that, in any event, DHL could not have physically undertaken the contract, I also reject their evidence. For reasons already given that was obviously not the situation when the heads of agreement were signed. Apart from anything else inclusion of clause 2.7 in the heads of agreement would not make any sense if that had been the position.
[132] But once Mr Hyslop had been dismissed by Mr Clark and excluded from the project, any prospect that the refurbishment contract would be awarded to DHL evaporated. Without Mr Hyslop DHL did not have the ability to perform the contract. Mr Clark was also clearly involved in the decision to proceed with the joint venture even though in terms of clause 2.7 the failure to award the contract to DHL meant that technically the heads of agreement was at an end. He was a party to the heads of agreement and without his co-operation it would not have been possible for that outcome to be reversed.
[133] In my view this combination of events (dismissal of Mr Hyslop from the project, assuming control of the partnership project for Mr Clark’s own benefit, and participating in the abandonment of any entitlement that the partnership had to administer the refurbishment contract) constituted a breach of the duty of good faith owed by Mr Clark. From the time Mr Hyslop and the partnership were excluded from the project Mr Clark was effectively preferring his own interests (through his trust) to the interests of the partnership.
[134] Before considering the implications of these findings it is appropriate to briefly respond to the plaintiff’s allegation that Mr Clark personally took over the refurbishment contract and reaped the benefit.
[135] While I agree with Mr Churchman that Mr Clark has downplayed his role in the refurbishment contract, I am nevertheless satisfied that it was actually performed by CH 2002, not Mr Clark personally, and that the project was managed by Brian Canning. Indeed, under cross-examination Mr Hyslop accepted that, with the exception of a few payments that went through Mr McLauchlan’s trust account, payment for the refurbishment came from CH 2002. Although Mr Clark obviously had a significant involvement in the refurbishment contract, the evidence falls well short of establishing that he was personally conducting the contract or that (leaving aside the various companies associated with him which will be discussed later) he was obliged to personally account for profits generated by the refurbishing. Despite extensive discovery and inspection there is no evidence of any payments to Mr Clark personally and there is no sound basis on which such an inference could be drawn.
[136] I therefore reject the plaintiff’s proposition that the defendant was obliged to account to the plaintiffs or the partnership for any profits generated by the refurbishing contract.
[137] In arriving at that conclusion I have not overlooked the delays in transferring Cargill House to CH 2002 and the shares in that company. An explanation for the delays has been provided, and I accept it. While these delays might give rise to technicalities, I am satisfied that for present purposes they do not give rise to any matters of substance.
[138] Now I return to the implications of the conclusion reached in para [133] above. The pivotal issue is whether the defendant’s breach of the duty of good faith is capable of sustaining an award of damages based on the loss of a chance. If that is answered in the affirmative it will be necessary to put a value on the lost chance.
[139] In the Law of Contract in New Zealand (Third Edition 2007) by Burrows, Finn and Todd, the principles relating to a loss of chance are described:25
Awarding damages for a lost chance involves more than mere matters of quantification. A prior question, which is one of considerable difficulty, is whether or how their award can be reconciled with the ordinary requirement in a civil action, that the plaintiff prove his or her case on the balance of probabilities. Normally, civil litigation results in an all or nothing outcome. A plaintiff who establishes loss on the balance of probabilities recovers full damages whereas if the evidence falls short of probability the action fails. Chance cases are different, for the plaintiff recovers a proportion of a loss, that is, the value of the chance of which he or she has been deprived.... The plaintiff recovers not for an outcome, but for the lost chance that an outcome may or may not have happened or been prevented. Crucially, recovery does not depend on proof that the benefit of the chance could be assessed as being more likely than not or at least 51 per cent in favour of the plaintiff. The question is whether the chance that was lost was “real” or “substantial”, as opposed to the loss of a mere speculative possibility. If it was a real chance the inquiry thereafter is simply into its value.
French J adopted that approach in Sanders v Lang26. I will adopt the same approach.
[140] Mr Andersen suggested that in Chirnside the Supreme Court disapproved of damages being awarded in a joint venture situation on a loss of chance basis. Like French J, to whom a similar argument had been advanced in Sanders, I do not consider that Chirnside is applicable. In that case the Supreme Court found that the plaintiff had not lost the chance of entering into a profitable venture because he was already a party to that venture. In other words, as the Supreme Court saw the matter the opportunity had gone forward, its potential had been realised, and there was no relevant element of chance. The joint venture had already demonstrated its
profitability27.
25 At page 681
26 Sanders v Lang at [96]
27 At [100]
[141] It was further argued by Mr Andersen that Sanders could be distinguished because that case involved a breach of a joint venture agreement whereas the case under consideration involves the Partnership Act, particularly s 41. I also reject that proposition. As I have already found, there was a duty on the defendant to complete transactions that had begun but were unfinished at the time of dissolution. As the Court of Appeal commented when striking out the defendant’s second appeal, Mr Clark was under a duty to account for the business opportunities that the heads of agreement afforded the Clark interests. The hotel project clearly fell within that category. I cannot see any basis on which Sanders should be distinguished.
[142] Is there a “real or substantial” possibility that, but for the defendant’s breaches, DHL would have been awarded the refurbishment contract? For reasons already given, I am satisfied that this has been established. In other words, DHL lost the chance of undertaking that contract by virtue of the defendant’s breaches.
[143] Having reached that conclusion it is necessary to place a value on the lost chance. The plaintiffs approached the matter on the basis that there was a “known” profit made on the construction (the savings on budget of $1,311,711 which came down to $1,085,000 for construction costs). They claim that the defendant should be required to account for $542,580, being the partnership’s share of the savings on construction costs. They also contend that there is a flow on effect in terms of the interest that Mr Clark should be permitted to charge.
[144] Inevitably, as French J said in Sanders28, placing a value on the loss of a chance is notoriously difficult and of necessity must be very broad brush. Given that the savings relied on by the plaintiffs will be reflected at least to some extent in the valuation of the (A) shares the Court must be careful to avoid doubt counting. I also keep in mind that if the contract been awarded to DHL some of the profit would have been skimmed off by sub-contractors and also there would have been pressure from Scenic Circle to keep the refurbishing cost down. I doubt that DHL’s profit would
have been anywhere near the profit contended by the plaintiffs.
28 At [99]
[145] It is true that during negotiations between Mr Hyslop and Mr Clark, Mr
Clark’s solicitors offered a package on 1 June 2002 which included:
The saving on the construction of Cargill House 2002 Limited will be yours. This saving relates to the consultancy fees. You estimate that this could be as high as $400,000.
This was, of course, part of an overall negotiating package. It could not be binding on CH 2002 without the concurrence of the Scenic Circle interests and there is no evidence that Scenic Circle was aware of it. In any event no settlement was achieved between Mr Hyslop and Mr Clark and there was no provision in the heads of agreement to the effect that DHL could expect any particular level of profit.
[146] Taking all factors into account I have concluded that $250,000 would fairly reflect DHL’s (the partnership’s) loss of chance and this will have to be factored into the account taking. The figure of $250,000 reflects both components of the loss of chance claimed by the plaintiffs (loss of profit and loss of ability to apply the profit toward the partnership’s advance to CH 2002). Thus, no adjustment will be required to the interest payable to Mr Clark.
[147] Now I turn to the other specific matters concerning the refurbishing contract.
Benefit to other organisations associated with Mr Clark
[148] The plaintiffs allege that L A Clark Limited, Woodworks Southern Limited, and A Step Up Joinery Limited all benefitted from the refurbishment contract and that the defendant is obliged to account to the partnership for their profits because of his involvement with each of those companies. This is based s 32(1) of the Partnership Act which requires a partner to account for personal benefits from any transactions concerning the partnership that are undertaken by a partner without the consent of the other partners.
[149] The defendant denies any obligation to account. Mr Andersen emphasised that not every benefit received by a partner is accountable to the partnership. He notes that the partnership had bought timber from L A Clark Limited before
dissolution and no issue was taken with that arrangement. He also notes that Woodworks Southern Limited and A Step Up Joinery Limited were not in competition with the partnership because the partnership could not have physically undertaken the refurbishing work. Apart from that the defendant denies that he had any interest in A Step Up Joinery Limited.
[194] Question 1.5: Is the defendant required to account to the plaintiffs for any money received by the defendant’s son-in-law’s building company in relation to the refurbishment/construction of Cargill House, and if so, for how much? Answer: No: see [155] – [157] above.
[195] Question 1.6:
(a) Should the defendant be required to account to the plaintiffs for the materials removed by Paul Munro prior to development?
(b)If the defendant is required to account for such materials, what is the amount that is required to be accounted for?
Answer: The only obligation is for the defendant to account for any money received and that issue is to be determined by the account taker: see [158] – [160] above.
[196] Question: 2.1: How are the A shares of Cargill Hotel 2002 Limited to be valued:
(a) The plaintiffs maintain that the A shares are to be valued by the use of the DCF model, on the basis of fair value with the purchaser not required to make an interest free loan of $1,250,000 as part of the conditions of purchase;
(b)The defendant says they are to be valued using the principles of a willing purchaser/willing seller where the purchaser is required to contribute interest free funds of $1,250,000 on the terms the defendant is required to contribute such funds.
Answer: The A shares are to be valued in accordance with [178] above. It will be for the valuer, and ultimately the account taker, to determine the appropriate method or methods. The underlying purpose will be, however, to arrive at a fair value based on a willing seller and a willing purchaser. The advances of $1,250,000 are to be taken into account on the basis that the shareholders are entitled to 6% per annum on those advances.
[197] Question 3.1: How are the B shares of Cargill Hotel 2002 Limited to be valued:
(a) The plaintiffs maintain that the B shares represent the true value of the purchase price of the Hotel from Danube Holdings, and are fully accountable by the defendant for the purposes of a taking of account at the value of $1,200,000 treated as if it was free of taxation liability.
(b)The defendant sates that a fair market value takes into account the date on which they will be repaid.
Answer: They are to be valued in accordance with [179] above. The fair value will take into account the date/s on which the shareholders’ advances are to be repaid.
[198] Question 4.1: There is a dispute over the transfer to be resolved:
(a) The plaintiffs seek compensation to the partnership for interest not received by Danube Holdings Ltd from Cargill Hotel 2002 on the
vendor mortgage because clauses 12.7 and 3.2(g)(i) set out in the heads of agreement dated 12 July 2002 have not been applied, or have been departed from as the property was transferred after the redevelopment and not before?
(b)The defendant says that Danube Holdings Ltd was not prejudiced by the date of settlement as it is entitled to receive $346.73 a day for each day the settlement occurred after 5 December 2001 which is more than the 6% interest on the vendor mortgage ($295.89 a day) which took effect from settlement;
Answer: The plaintiffs are entitled to interest at 6% per annum on the vendor mortgage which starts to run on the date to be set in accordance with [186] above plus the payments under clause 12.7: see [189] above.
[199] Question 5.1: Should the valuation be at current market value at the date it is valued or should the valuation treat the 8th floor of the hotel as if the work presently being carried out on it was completed? Answer: The valuation shall be as at 30 June 2010 and shall take into account the 8th floor as if the work presently being carried out had been completed at that time: see [173] above.
Interest
[200] One of the terms of the partnership agreement was that Mr Clark was to receive interest at 10% per annum on funds injected into the partnership by him. This interest was to be paid before any profit was apportioned. According to the defendant that interest component now exceeds $3m in relation to the hotel project alone and continues to run. That is vigorously disputed by the plaintiffs.
[201] The evidence indicates that the purpose of the term was to compensate Mr Clark for the risk taken by him personally in injecting funds into the partnership. On that basis money borrowed by Mr Clark personally and then injected into the partnership would attract interest at 10% because the risk would still rest solely with
Mr Clark. This would be so even if the funds had been borrowed by Mr Clark at lower rates of interest.
[202] On the other hand, Mr Clark would not be entitled to recover interest at 10% if the funds in question were advanced to the partnership or secured in whole or part over partnership assets. In that situation the risk would not rest with Mr Clark alone. Nor would it apply to funds that were injected by the partnership.
[203] Counsel for the plaintiffs also raises this issue
94. The issue that the Court now must therefore determine, is whether, having denied that there was a partnership, and purporting to terminate it “if there was one”, the defendant is entitled to charge interest on all funds advanced, (regardless of source) which will later be addressed, at 10%, up until the present date. The plaintiffs’ position is that there is no legal basis for this.
To the extent that this submission seems to suggest that the term relating to the payment of interest at 10% is ineffective, I reject the submission. I have already found in the first judgment that it was a term of the partnership.
[204] I do not accept that dissolution of the partnership automatically brought the interest provision to an end. Nor do I accept that the accounts prepared by Mr Craw are conclusive or operate as an estoppel. Like many other aspects, the account taker will need to visit the question of interest payable to Mr Clark afresh in accordance with the directions to be given shortly.
[205] On the other hand, I agree that from the date of dissolution (30 October 2002) the defendant’s duty of good faith in winding up the partnership affairs in a timely fashion needs to be factored into the equation in relation to the Cargill House project (the other projects have already been dealt with separately). Having dissolved the partnership and taken over the project without the consent of Libra, Mr Clark’s duty of good faith required him to take all reasonable steps to wind up the affairs of the partnership in a timely fashion. It would be inequitable for the interest to run beyond the date on which the affairs of the partnership should have been wound up if the duty owed by Mr Clark had been discharged.
What was a reasonable time for winding up the partnership?
[206] There are two possible approaches to this issue. One is to approach the matter without taking into account delays occasioned by the litigation. The other is to take into account any reasonable delays occasioned by the litigation.
[207] Having reflected on that issue I have concluded that the only realistic approach is to take into account reasonable delays occasioned by the litigation. In all the circumstances the defendant was entitled to challenge the plaintiffs’ contention that there was a partnership and, having received this Court’s ruling, to appeal it. Given the complexity of the issues involved, I also accept that a relatively lengthy interlocutory process leading up to the taking of accounts was inevitable.
[208] What period that should be allowed?
[209] The judgment of this Court confirming the existence of the partnership was delivered on 4 February 2005 and the Court of Appeal delivered its decision dismissing the appeal on 31 October 2006. The delays arising from this litigation need to be allowed. But I do not make any allowance for the application for leave to appeal to the Supreme Court which was rejected on the basis that the appeal was unarguable.
[210] Taking of accounts was ordered on 10 June 2008 following which there was a second appeal to the Court of Appeal. I do not make any allowance for that second appeal which was struck out.
[211] By the end of 2008 PWC had been appointed as account takers. After that there were extreme delays in relation to discovery. These matters were traversed in this Court’s judgment of 22 April 2010.
[212] While I accept that this is extremely complex and difficult litigation and that there has been extensive non-party discovery, I am satisfied that there were unnecessary delays in the discovery process and that those delays were attributable
to the actions of the defendant. It would be inequitable if he was to benefit from those delays by continuing to collect interest at 10% per annum.
[213] In the normal course of events it could not be expected that the taking of accounts would be completed until much later this year. Until that time there could be no final settlement of the partnership’s affairs. However, it would be extremely unfair to the plaintiffs if the defendant was rewarded for delays that are largely of his making by allowing interest to run to that time.
[214] After weighing all factors I have concluded that interest should cease to run on 30 June 2010 on the basis that the partnership will be deemed to be finally wound up on that date. To the extent that this also happens to be the balance date of the company I acknowledge that there is a degree of pragmatism. But the matter is complicated enough without compounding the issues by selecting a date that would probably require a complete reformation of the company’s accounts.
[215] To summarise: interest in relation to the Cargill House project will cease to run on 30 June 2010. All valuations relating to that project are to be completed as at that date. Interest will cease to run in relation to the other projects as indicated at [47], [71], [90] and [101].
Answers to specific questions
[216] Question 91.: Do all funds advanced by the defendant to the partnership, regardless of their source (including bank lending, or by mortgaging partnership property) incur interest at 10%? Answer: No. The principles to be applied are explained in [200] – [205] above.
[217] Question 9.2: If all funds advanced by the Defendant do not incur interst at
10%, what advances are excluded? Answer: Those described in [202] above. There will also need to be an adjustment to reflect [70] above.
[218] Question 9.3: Does the 10% interest continue beyond the date of dissolution of the partnership, and if so, for how long? Answer: Yes. St Albans Street will run
until 30 October 2003 in accordance with [47] above. Law Street will run until the date on which the project was completed, as determined by the account taker: see [71] above. Eastbourne Street will run until 31 December 2006 in accordance with [90] above. Haggard Alexander Drive will run until 9 August 2007 in accordance with [101] above. And Cargill House will run until 30 June 2010 in accordance with [214] above.
[219] Question 9.4: If, after the taking of an account, it is determined that the defendant has had the use of funds which he is found to owe the partnership, are the plaintiffs entitled to the same 10% for monies they have been held out of? Answer: No. This was not a term of the partnership.
[220] Question 9.5: Should there be an adjustment to the interest payable to the defendant because he obtained a bank mortgage that was secured over partnership assets (the plaintiffs claim this occurs in two instances – to fund the purchase of the separate business Wood Solutions in 2001, and over other partnership property in
2003)? Answer: Yes: see [70] above.
[221] Question 9.6: In relation to the refurbishment of Cargill House, depending on the outcome of issues [1.1]-[1.6], how is interest to be treated on any accounting that the defendant is required to do to the plaintiffs? Answer: This has already been taken into account in the figure of $250,000 referred to in [146] above.
[222] Question 9.7: Is the defendant permitted to charge out interest on funds advanced to the partnership at 10% that the plaintiffs maintain were previously charged out at lesser rates in relation to unit 7 at St Albans, and the loan from Albert Alloo & Sons Nominees for the purchase of Cargill House? Answer: Yes. See [201] above.
Wages
[223] It was a term of the partnership that Mr Hyslop’s wages paid by Mr Clark were to be added back and taken from Libra’s share of the partnership profits. Mr Hyslop claims that 50% of his work for Mr Clark was unrelated to the projects
that I have found to be partnership assets. He seeks an adjustment accordingly. Although Mr Clark accepts that some adjustment is required, he contends that 50% is much too high and he would be surprised if the non partnership work exceeded
5%.
[224] Before that issue can be resolved two preliminary issues need to be determined:
(a) Whether Mobile Batching Systems Limited is to be treated as a partnership asset (this was left open in the judgment of 4 February
2005).
(b) Whether the apportionment should be based on a 40 hour week.
[225] As to the first issue, I concluded in the decision of 4 February 2005 that there were too many loose ends to declare Mobile Batching Systems a partnership asset and the parties were left to consider the matter further. The defendant now concedes that it is a partnership asset. Given that concession I proceed on the basis that Mobile Batching Systems is a partnership asset.
[226] Turning to the second matter, Mr Hyslop was paid $17 per hour for a 40 hour week. In fact, however, he worked much longer hours on both partnership and non partnership matters. In arriving at an appropriate percentage I proceed on the basis of a 40 hour working week.
[227] I accept Mr Hyslop’s analysis of as to the non partnership work, which was not seriously challenged by the defendant:
1997/98 5% 1999 30% 2000 50% 2001 60% 2002 60%
Those figures take into accent that Mobile Batching Systems was a partnership asset. [228] The specific questions relating to this matter are answered as follows:
[229] Question 10.1: In calculating the adjustment to be made to the partnership accounts because of the need to apportion the second plaintiff ’s wages between partnership and non-partnership activities:
(a) Is the time spent on Mobile Batching Systems Limited to be treated as a partnership activity?
(b) What would be a fair apportionment of time over the duration of the partnership?
Answer: Yes to (a) and as to (b), the apportionment is set out in [226] above.
[230] Question 10.2: Are the plaintiffs entitled to the benefit of an interest holiday to reflect the time the second plaintiff was not advancing partnership matters because he was working on the other activities? Answer: No, this was not one of the terms of the partnership.
Tax losses
[231] One of the terms of the partnership agreement was that when apportioning the final profit of the partnership:
Losses will be utilised by [Mr Clark] but taken into account in the final calculation.
Although it is common ground that the “losses” were tax losses, there is disagreement as to what the words “but taken into account in the final calculation” mean.
[232] The plaintiffs do not know what tax losses have been claimed by Mr Clark. As I understand it, their position is that Mr Clark will have to account to the partnership for any tax losses that he utilises. This proposition was not explained in any great detail. It was also suggested that the utilisation of tax losses could have implications for interest payable to Mr Clark.
[233] On the other hand, the defendant’s position is that he does not have any obligation to account to the plaintiffs for his use of the tax losses. If the partnership is ultimately found to have made a loss, there is no basis upon which Libra should be entitled to claim the tax losses because the whole of the partnership deficit would have been met by Mr Clark. And if the partnership makes a profit then the tax losses claimed will be paid back by Mr Clark and the interim benefit he receives from his interim use of the tax losses will reflect his entitlement under the partnership.
[234] The formal questions posed for the Court to answer are:
Question 11.1: Does the defendant have to account to the plaintiffs for his use of the tax losses?
Question 11.2: If so how is such value quantified?
At this stage I am only prepared to give provisional answers. These questions were not argued in depth and I am conscious that there might be hidden implications.
[235] The words “but taken into account in the final calculation” must mean something. My provisional view is that they mean that the actual tax saving enjoyed in any year by Mr Clark is to be taken into account when arriving at his 50% share of the partnership profit. Beyond that, I do not think that Mr Clark has any obligation to account to the partnership.
[236] The provisional answer to question 11.1 is, therefore, yes in the sense described in the preceding paragraph. Given that answer, question 11.2 does not require an answer. Leave is reserved for the parties or the account taker to refer this matter back to the Court for further directions. In that event I would require the account taker’s views and full argument by counsel.
Valuation of plant
[237] Question 13.1 asks:
What methodology should PWC use to determine the value all items of plan owned by the partnership?
It is my understanding that it is now common ground that the book value of all items should be utilised. If my understanding is incorrect, counsel will no doubt bring that matter back to the Court.
[238] Question 13.2 asks:
Does that plant include the mixer owned by Mobile Batching Systems Ltd which has been struck off the register?
The answer is yes: see [225] above .
[239] Finally, in relation to the valuation of plant, question 13.3 asks:
What was the nature and extent of plant at Moreau Street and what payment, if any, did the plaintiffs receive for such plant?
Although Moreau Street was owned by a third party, I accept that some partnership plant was housed there. Any plant that belongs to the partnership will need to be taken into account at book value. It will be for the account taker to determine what plant qualifies as partnership plant and the book value to be applied.
Date of valuation/taking account
[240] Questions 14.1 and 14.2 ask:
14.1 Should a date be fixed for determining the dissolution so that all valuations and division are on that date (subject to any interest adjustment for money found to be owing)?
14.2 If no one date is fixed, on what basis should the valuation exercise be carried out?
The answer to question 14.1 is yes with the date being 30 June 2010: see [214]
above. Given that answer there is no need to answer question 14.2.
Four sider machine
[241] Although this item does not appear to be the subject of any separate questions, it was debated during the course of the hearing.
[242] According to Mr Hyslop it has been acknowledged by Mr Clark that this is Mr Clark’s asset. Mr Hyslop wants to be paid for it. He says that it has been left outside at Hamilton Building and Joinery for the last eight years and now has no value whatever. He wants the account taker to ascribe some value for it for which the defendant should have to account.
[243] For his part, Mr Clark says that this item is outside the partnership and should not attract any ruling.
[244] Although strictly speaking this is not a partnership item, it would be sensible for it to be resolved as part of the final settling of accounts. Otherwise, it will fester, as seems to have been the case with some other items. My suggestion is that the parties adopt a pragmatic approach of arriving at a value based on the condition of the machine as at the date of dissolution of the partnership. The account taker should not be burdened with having to make findings in relation to this item.
Further steps
[245] Once counsel have had an opportunity to consider this judgment they should confer about any matters that they consider have not been answered or where they believe the answer is unclear. Within six weeks either a joint memorandum or individual memoranda should be submitted detailing those issues and the stance of each party. A telephone conference will then be convened so that the way forward can be discussed.
[246] In the meantime, the parties are to commence preparation of their submissions and accounts in accordance with paragraph 15.1 of the joint memorandum so that PWC can fix the cost of taking of account, that amount can be paid by the parties, and the task can be undertaken as soon as possible. Subject to any contrary view that counsel may wish to express, my view is that the three months referred to in the joint memorandum should start to run from the delivery of this judgment.
[247] There will also be a general reservation of leave for the parties to apply further should the need arise. However, if there are any issues beyond the scope of this judgment it would be desirable if notice of the issue was given wit hin six weeks of the delivery of this judgment. A telephone conference could then be convened.
Costs
[248] My preliminary view is that costs should be reserved and that the ultimate award, if any, should wait until the accounts have been taken and any further involvement of the Court has been completed. Resolution of the joint issues was an essential step before accounts could be taken and the answers have not significantly favoured either party. Thus neither party could be said to have succeeded or failed.
[249] If either party wishes costs to be considered further at this stage that party should lodge a memorandum not exceeding three pages within two weeks. The other party will have a further week to respond by way of memorandum not exceeding three pages.
Solicitors:
Kensington Swan, Wellington for Plaintiffs
Albert Alloo & Sons, Dunedin for Defendant
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